Sensex Climbs as RBI Unexpectedly Holds Indian Interest Rates

Santanu Chakraborty

December 18, 2013 — 8:04 AM ESTDecember 18, 2013 — 8:04 AM EST

India’s benchmark equity index rose to a one-week high, led by businesses sensitive to borrowing costs such as capital goods and real estate, after the central bank unexpectedly refrained from raising interest rates.

Bharat Heavy Electricals Ltd., the largest maker of power equipment, posted the biggest gain in three months. DB Realty Ltd. surged 7.7 percent, helping a gauge of developers jump the most in two months. Reliance Industries Ltd. had the sharpest advance in a month.

The S&P BSE Sensex increased 1.2 percent to 20,859.86 at the close, ending a six-day retreat. Governor Raghuram Rajan left the repurchase rate at 7.75 percent, a move predicted by only five of 31 economists surveyed by Bloomberg. Indications that vegetable prices may fall, combined with a more stable exchange rate and lag effects from the previous rate increases give reason to hold borrowing costs even though inflation is “too high,” the central bank said in a statement.

“Rajan is saying that he has some reason to believe that food prices will come down in the near future, and if they don’t he will have to take a harsh decision,” K.R. Bharat, managing director of Advent Advisory Services in Mumbai, told Bloomberg TV India today. “He is giving this idea of his a chance. The market has no complaints at all with what he has done.”

Property Stocks Jump

DB Realty had the sharpest gain in two months, helping the S&P BSE India Realty Index jump 3.5 percent, the most among the 13 sectoral indexes compiled by the BSE. Housing Development & Infrastructure Ltd. rallied 7 percent, the second-biggest gainer on the property index.

State Bank of India advanced the most in three weeks to 1,763.40 rupees, halting a six-day, 9.1 percent drop. Mortgage lender Housing Development Finance Corp. rallied 2.5 percent to 798.25 rupees. Canara Bank Ltd. and Bank of India rallied more than 5 percent.

Rajan’s decision comes ahead of a U.S. Federal Reserve announcement today on whether to start curtailing $85 billion in monthly bond purchases that’s increased flows to emerging markets. Global funds have bought a net $18.9 billion of Indian shares this year, the most in Asia after Japan, data compiled by Bloomberg show.

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India’s wholesale prices rose in November at the fastest pace in 14 months and consumer prices gained the most in data going back to January 2012, official figures showed in the past week. A separate report showed industrial production contracted in October by more than economists had predicted. Economic growth of 4.8 percent in the three months ended September was below 5 percent for a fourth quarter.

Rajan, who boosted costs twice since taking office in September, said Dec. 11 that the monetary authority is “very uncomfortable” with current level of inflation.

The Sensex has climbed 7.4 percent this year, the best performer among the four largest emerging markets, and trades at 13.5 times projected 12-month earnings, compared with the MSCI Emerging Markets Index’s 10.4 times.